Edward DeMarco: “Treasury cannot be repaid under any foreseeable scenarios.”

Part 1of 2

In February 2012, just six months prior to implementing the Net Profit Sweep Agreement, FHFA Acting Director Edward DeMarco sent a letter and an updated Strategic Plan to Congress entitled:

A Strategic Plan for Enterprise Conservatorships: The Next Chapter in a Story that Needs an Ending


In the plan, Mr. DeMarco makes two claims:

  • “…it is clear that the draws the companies have taken from the Treasury are so large they cannot be repaid under any foreseeable scenarios.”
  • “The absence of any meaningful secondary mortgage market mechanisms beyond the Enterprises and Ginnie Mae is a dilemma for policymakers expecting to replace the Enterprises. This fact was a key motivation for the conservatorships and for the Treasury support agreements in the first place.”

On the first point, Mr. DeMarco was either patently wrong or he intentionally mislead Congress. The Senate and Housing Banking Committees should have initiated inquiries into the circumstances contributing to the February Strategy Update…and they still can conduct investigations.

The second claim is a clear admission of an ulterior motive.

So, if the first claim is a blatant lie, the second claim uncovers the truth. A “key motivation” of the take-over of Fannie and Freddie was to systematically disassemble them and move toward creating a new securitization platform. By now, we all know that the FHFA and Treasury instructed FnF to build the Common Securitization Solutions, LLC.

From an entry on my December 17 blog:

Mr. DeMarco adds “… while competing securitization platforms may emerge in the future, back-office operations arguably lend themselves to a public utility construct…”

That comment is a further elaboration on the ulterior motive. Mr. DeMarco, while serving as the seemingly conflicting dual role of regulator AND conservator, states his belief that the new securitization platform should be considered “a public utility.”

It’s hard for a company to survive when the pretext for conservatorship was contrived in the first place.  Then, combine that fact considering the Conservator’s self-admitted goal is to eliminate the companies and replace them with a public utility platform where Big Banks will dominate the landscape, it’s easy to see the conflict of interest.

“…by creating a path by which the Enterprises’ role in the mortgage market is gradually reduced while maintaining market stability and liquidity…this next chapter will also see a gradual reduction in the Enterprises’ dominant position in holding mortgage credit risk as private capital is encouraged back into that role.”

The February 2012 Strategy outlined three strategic goals…”for the next phase of conservatorship:

  1. Build. Build a new infrastructure for the secondary mortgage market.
  2. Contract. Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations.
  3. Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages”

So, the $200 Billion question is where are we with conservatorship?

“The final chapter, though, remains the province of lawmakers. Fannie Mae and Freddie Mac were chartered by Congress and by law, only Congress can abolish or modify those charters and set forth a vision for a new secondary market structure.

As with the securitization platform, the goal is not to rebuild Fannie Mae and Freddie Mac but rather to… build a new infrastructure for the future. The goal is not a proprietary system but rather an open system that promotes competition and transparency while forming a basis for a stable, liquid, and efficient secondary mortgage market.

Although that future may not include Fannie Mae and Freddie Mac, at least as they are known today, this important work in conservatorship can be a lasting, positive legacy for the country and its housing system.”

Did you catch that!?  Another goal for Mr. DeMarco was to create “a lasting, positive legacy” of his work. I guess the ends justify the means…

Perhaps Mr. DeMarco felt the same as Jonathan Gruber (Obamacare) that Americans are just plain stupid and that we would never figure out this scheme. Further, Mr. DeMarco probably also realized that if Americans did figure out the scheme, who would do anything about it?

Congress? (I chuckled to myself as I typed that)

The Administration? (they’re the perpetrators…!)

Courts!? (we’re trying…but these lawyer games are tricky!)

Seems like it might be a perfect multi-billion dollar crime!

Mr. DeMarco also said… “It is also worth noting that shareholders of each Enterprise effectively have already lost their entire investment.” This assessment is based on the original assessment that FnF ‘could not repay Treasury under any foreseeable scenario.’

How did Mr. DeMarco get that job!? And he was only an Acting Director! How Congress allowed an un-confirmed acting director to wield this much enormous power is baffling…

“FHFA has since overseen the largest, most complex conservatorships in history.”

…to be continued…


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